For most Australians superannuation can be an individual’s greatest asset, the idea of losing it when declaring bankruptcy is a very authentic concern for the majority of our clients. With certain parts of the economy doing fairly well and other parts undergoing difficult economic times, bankruptcy numbers in Australia still continue to increase. Economists don’t speak about Australia’s two-speed economy much anymore, but it certainly still is two-speed. With the help of a long-term boom in the Sydney and Melbourne housing markets, these major centres are doing quite well running at a nice speed, with no sign of stopping anytime soon. However mining areas in North Queensland and Western Australia have basically stopped dead and in some areas firmly stuck in reverse.
The Past: Superannuation and bankruptcy. Not very long ago, the Bankruptcy Act 1966 instructed that all property (including superannuation) that belonged to a bankrupt at the start of their bankruptcy was to be awarded to their creditors. This brought up the question: was there an interest in a superannuation fund property? The law expressly answered this question with an ambiguous no – the interest of a bankrupt in a regulated superannuation fund was not property divisible among creditors. Then again, this protection of superannuation was not set in stone. In 2007 the rules changed, at that time the excess of a bankruptcy’s interest in a superannuation fund that exceeded the pension ‘reasonable benefit limit’ or (RBL) did constitute property that was divisible among creditors.
Post 2007 we have ‘Simpler Super’. The simpler super changes denoted a considerable change for superannuation and bankruptcy. The main change was, put simply, your superannuation is safe over and above the pension RBL amount. This indicates that protection of superannuation upon bankruptcy is now absolute, technically, a bankrupt can now have a huge amount of super and it will be safe. The government formally outlined the changes through its explanatory memorandum, Superannuation Legislation Amendment (Simplification) Bill 2007, as follows:
Currently, under the Bankruptcy Act 1966, a bankrupt’s interest in a superannuation fund up to the bankrupt’s pension RBL is protected from being divisible among creditors. A bankrupt’s superannuation interest in excess of the pension RBL automatically vests in the bankruptcy trustee. The amendments remove references to RBLs from the Bankruptcy Act 1966 to ensure consistency with the new Simplified Superannuation rules, which abolish RBLs with effect from 1 July 2007. This means that, from 1 July 2007, a bankrupt’s entire interest in a superannuation fund is protected, if you know what you are doing.
Frequently Asked Questions
Question: Does this suggest that I can voluntarily contribute extra funds to my superannuation before I file for bankruptcy and it will be safe?
Answer: No. Even though these changes protect your superannuation, 100% voluntary contributions beyond your employers required 9.5% will be considered an asset and accessible to creditors considering that it will be deemed a preference payment. Essentially, if you sell your house and make $50,000 profit from doing this, then shovel it off into your super fund, the trustee will see that as a preference payment, or in plain English you paid your super fund $50,000 in preference to your creditors, so the trustee will claw back that excess from the fund, and put it towards your debts.
Question: What about my Self-Managed Super Fund (SMSF), is it also safe?
Answer: Yes. But there are things you will want to do once you are bankrupt; In the case of a self-managed super fund and bankruptcy, take note that the Superannuation Industry Supervision Act 1993 rules that a “disqualified person” must not be a trustee of a superannuation entity. Essentially, if you are bankrupt you can no longer be a trustee of any trust including a super fund. A disqualified person includes a person who is an insolvent under administration, for instance an undischarged bankrupt.
Ultimately this means if you have a SMSF, you will have to retire or resign as the trustee, or director of the corporate trustee, before becoming bankrupt or within 6 months after filing for bankruptcy. Failure to do so can result in imprisonment for a maximum of 2 years. Soon after the person resigns/retires, the SMSF will quite possibly fail to fulfill the basic conditions necessary to be an SMSF and will mandate a restructure.
Restructuring can include transferring the bankrupt’s superannuation interests to a regulated superannuation fund then terminating the SMSF. Or you can designate a registrable superannuation entity (RSE) licensee to act as trustee of the SMSF, at which time the fund would cease being an SMSF and would turn into another form of superannuation fund. Although RSE licensees can be expensive, this is preferable where the fund has ‘lumpy’ non-liquid assets (such as property) that can not readily be rolled into another superannuation fund. Commonly, a person who holds an enduring power of attorney in respect of a member can act as trustee of the SMSF in place of the member.
Question: I’m old enough to draw down my super, are all my payments to myself safe irrespective of how much?
Answer: Be careful here, this could genuinely cost you! According to the discussion above, an interest in a superannuation fund is thoroughly protected upon bankruptcy. The same applies to any lump sum gained from a superannuation fund as mentioned by the Bankruptcy Act. So for example, you as a bankrupt who accepts a lump sum of $10 million from your superannuation fund could keep that money and it will be safe. However be warned the same is not true of pension payments received from superannuation funds. They are not protected identically. Pension payments are regarded as income and income only receives minimal protection from creditors. The specific level of protection afforded to pension payments is adjusted for inflation twice a year, but as at 22 February 2017, the level is as follows:
Dependants Income Limit
over 4 $74,441.00.
Regardless of what you earn over these amounts annually, 50% of the excess is payable to the trustee the same as any income earned during bankruptcy and paid to creditors.
The difference in the treatment between lump sums and pensions has considerable practical implications now that account-based pensions have been introduced; don’t assume it’s all safe and no matter what you do, get the right advice. At this point we advise you to call us and we will point you in the right direction. In other words, your super needs to be handled with care. Every case has a distinct set of circumstances and between our firm and your financial advisor, we will secure the right outcome for you. If you need to know more, call Bankruptcy Advice on 1300 879 867.